VF Corp. Q1 2008 Earnings Call Transcript

| About: V.F. Corporation (VFC)
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VF Corp (NYSE:VFC) Q1 2008 Earnings Call April 22, 2008 4:30 PM ET

Executives

Eric C. Wiseman - President and Chief Executive Officer

Robert K. Shearer - Senior Vice President and Chief Financial Officer

Jean Fontana – Investor Relations

Analysts

Robert Drbul – Lehman Brothers

Jeffery Edelman – UBS Warburg

Kate McShane – Citigroup

Omar Saad – Credit Suisse First Boston

Virginia Genereux – Merrill Lynch

John Shanley – Susquehanna Investment Group

Todd Slater – Lazard Capital Markets

Brad Stephens – Morgan Keegan

Eric Tracy – BB&T Capital Markets

Operator

Good day and welcome to the VF Corporation first quarter 2008 earnings conference call. Please be aware that today’s conference is being recorded. At this time, I would like to turn the conference over to Jean Fontana.

Jean Fontana

Good afternoon and thank you for participating in VF Corporation’s first quarter 2008 conference call. By now you should have received today’s earnings press release. If not, please call 203-682-8200 and we’ll get you a copy immediately following the call.

Hosting our call this afternoon is Mr. Eric Wiseman, President and CEO of VF Corp.

Before we begin, we’d like to remind participants that certain statements included in today’s remarks and the Q&A session may constitute forward-looking statements within the meaning of federal securities law. Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements.

Important factors that could cause the actual results of operations or financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

At this time, I’d like to turn the call over to Eric Wiseman.

Eric Wiseman

Good afternoon and thanks for joining us on today’s call to discuss another record quarter for VF Corporation. Revenue growth of 10% was at the top end of our guidance, and earnings per share growth of 14% was actually quite a bit better.

Our Outdoor Coalition delivered another outstanding quarter of double-digit revenue growth. Image wear results were solid and contemporary brands results were right on track. These results illustrate the power of VF’s business model, strong brand and a lot of diversity in terms of products, geographies and channels of distribution.

I’m going to confine my remarks today to the areas that I believe are of most interest to you and then I’ll turn things over to Bob Shearer who will provide more detail in numbers.

My first comment is about the current environment. Those of you on our February call remember how I said then that business was very challenging out there and that we did not expect any meaningful recovery in 2008. The bad news was that we were right and the good news is that we were right and planned accordingly.

We’re still seeing lots of promotional activity out there exacerbated by cooler than normal weather in much of the country which means that seasonal goods are moving very slowly. We are not seeing a material change in order cancellations and delayed shipments but retailers are tightening up the pipeline and becoming even more conservative in their inventory planning and orders.

Against that backdrop we feel very good about our first quarter performance. As we noted in the release our international and retail businesses have powerful momentum and are working as a buffer against the difficulties of today’s environment particularly on the domestic side. We expect this momentum will continue which makes us comfortable with maintaining our annual guidance for 2008 with revenue and earnings per share expected to increase 9-10% respectively.

My second comment relates to our jeans wear results in the quarter specifically on the domestic side. Given the current environment in both the mass and mid-tier channels of distribution it may not be surprising that our jeans business was down in the first quarter. Half of that revenue decline was due to disappointing over-the-counter performance driven in part by consumers migrating to the very lowest priced products.

The other half was due to a combination of inventory reductions at retail, the shift in timing of certain programs in both our Mast and Lee businesses and the slow start to seasonal products that I just mentioned.

I also remind you that we posted very solid gains in both our Mast and Lee businesses in last year’s first quarter so we are up against tough comps. On the plus side we are encouraged that we are at least holding our share of market in most areas. In fact we are seeing market share gains in our Lee business.

The first quarter is not representative of what we expect for our jeans business for the year and we are looking forward to better results for jeans wear in the coming quarters as we indicated in the release. Overall revenue comparisons for our global jeans business should turn positive starting next quarter and continue in the second half.

While our domestic business is expected to run flat to down slightly for the next three quarters as the difficult macro environment continues, we do expect continued growth in our international jeans business. On the domestic side we have a large array of programs lined up for the second quarter and beyond including integrated new product launches and door expansion programs that have been tested and proven successful.

Internationally we expect growth to be fueled by our continued expansion into China and India as well as an additional seasonal delivery in Europe.

My third comment relates to our second quarter guidance. While our full year guidance remains intact the second quarter is a bit of an anomaly this year in part because VF is becoming a more seasonal company due to our acquired companies and more retail revenues.

A few key points I want to make about the quarter. First, our businesses remain very healthy as evidenced by the 10% revenue growth we expect in the quarter half of which will be organic. In fact with the exception of sports wear we are looking forward to growth across our coalition with another exceptionally strong quarter in Outdoors.

Second, higher levels of investment to support future growth particularly in Outdoor will have a disproportionate impact on profitability in our second quarter which is our seasonally lowest period. Outdoor revenues should continue to grow at a double-digit rate but operating margins will be below those reported in last year’s second quarter as we continue to make investments necessary to support the continued growth of our strong Outdoor businesses.

Third, bear in mind that last year’s second quarter included $0.04 benefit from the sale of the HIS trademarks which we obviously will not have in this year’s second quarter.

Fourth the acquisition of Seven for All Mankind and Lucy will be diluted to the tune of about $0.02 in the quarter.

My last comment relates to our outlook for the second half and the full year. We stated in the release that we expect healthy results in the second half of the year. Revenues continue to grow at a rate of around 8% with double-digit earnings per share growth. These results are not contingent upon any meaningful recovery in the economy or consumer spending. They are contingent upon our ability to execute well defined and developed plans for each of our businesses and I’m confident we will be able to do just that.

Now let’s hear from Bob Shearer.

Robert Shearer

Thanks Eric. Let’s start at the top. As Eric indicated our revenue growth of 10% was at the top end of our guidance of 8-10% growth. We are very pleased with the continued momentum in Outdoor, the solid performance in Image wear and the contribution to revenues from our new contemporary brands coalition.

As noted in the earnings release our international and owned retail businesses continue to be big growth drivers for us. Our international revenues rose 21% with double-digit increases in our North Face, Vans, Napapijri, Kipling and Reef international businesses. In jeans wear international growth is being drive by gains in Europe and Asia as well as strong performance in Mexico and Latin America. Not only are our international operations big top line growth contributors but during the first quarter they also drove significant profit gains from their higher than average profit margins.

Retail revenues grew 24% with our Vans, North Face, Kipling, Napapijri, Wrangler and Lee brands each growing their retail businesses at double-digit rates. We ended the quarter with 641 owned retail stores opening 15 new stores during the quarter.

For the full year we expect to open about 100 new stores with a significant number of those scheduled for the second quarter. These are all important factors in our growth expectations.

Looking now at total revenues, favorable foreign currency exchange rates contributed to the increase for the quarter accounting for $56 million or 3% of the revenue growth in the quarter and adding $0.09 to our earnings per share. Revenue contribution from acquisitions, Majestic, Seven for All Mankind, lucy and Eagle Creek was $141 million in the quarter, clearly a significant contributor or our revenue gain for the quarter.

Our organic growth was lower than that experienced during recent quarters, however our plans indicate more normal levels of organic growth beginning in the second quarter.

Our gross margin jumped 160 basis points to over 45% in the first quarter. Mix accounted for 70 basis points of the improvement with the remainder resulting from efficiency improvements particularly in our U.S. jeans business.

SG&A as a percent of sales rose by a smaller amount, 130 basis points, which includes a 70 basis point impact relating to the higher SG&A ratios of our expanding retail operations. First quarter SG&A also includes the expenses related to the Nautica Women’s sportswear exit.

Operating margins increased in our outdoor and jeans wear businesses. Our contemporary brands coalition reported operating margins of over 15% which also contributed to the overall higher margin levels in the quarter. Despite higher gross margins for the quarter, sportswear operating margins were lower for reasons I’ll discuss in a moment, while image wear margins were also below prior year levels due solely to the inclusion of a full quarter’s worth of Majestic results.

Now as to other details specific to individual coalition results I think Eric pretty well covered the jeans wear results so I’d like to fill in a few more details related to sportswear’s first quarter. Both revenues and operating income for sports wear were below prior year levels. In our release we noted the primary factors affecting revenues were first the decision by Nautica customers last year to reduce their product assortment, second lower sales of Nautica products to the off price channel. We also noted we recently decided to exit our women’s wholesale sports wear business.

Given the consolidation in the department store channel and the challenging environment in the women’s better sports wear category we weren’t able to gain enough critical mass in this business and the expenses to support it have been pressuring profitability. This action resulted in expenses in the quarter of $3 million and helps to explain the decline in sports wear’s operating income and margins. Decision will favorably impact sports wear margins in the second half of this year and next year as well. In fact we indicated that sports wear margins should recover to double-digit margins in the second half of this year.

Now I should point out as well that Nautica continues to have healthy women’s sleep wear, and swim wear businesses and that we will continue to offer women’s apparel in select Nautica retail stores and through our eCommerce site.

Wrapping up on sports wear we are pleased with the growth that we are seeing in John Varvatos and Kipling U.S. businesses.

Interest expense rose to $22 million from $14 million in last year’s quarter related to acquisition borrowings. The tax rate was 33.3% in the quarter, a point below last year’s rate and is indicative of what we expect for the full year. Our tax rate has been declining as the result of our lower tax rates in our international businesses.

Income from continuing operations increased 11% while eps rose 14% on 3% fewer average shares outstanding in the quarter.

Turning on to the balance sheet. Inventories rose 13% in the first quarter. As is often the case with our acquired companies inventory days within our most recent acquisitions are well above VF averages. Inventory levels within our existing businesses increased 6% very much in line with organic revenue growth expected for the second quarter. Obviously the reduction in inventory levels in our recently acquired businesses represents an opportunity for cash generation by year end.

Speaking of cash generation cash generated from operations was negative for the quarter which is typical for our first quarter as we build working capital to service our seasonally stronger quarters ahead. We continue to expect that we will generate about $700 million in cash from operations for the full year. Our debt to capital ratio remains low at about 29% and that is 25% net of cash on the balance sheet.

Now I’d like to provide some additional color on the second quarter. As indicated in the press release we expect to see continued strong top line growth of approximately 10% with about half the increase due to acquisitions and half from organic growth. We expect to see the continuation of gross margin improvement in the quarter which should be up by about 100 basis points. However, due to increases in the relationship of SG&A expenses to revenues and the fact that 2007 second quarter included a $7.5 million gain related to the sale of a business that is not repeated in 2008 our operating margin and earnings will decline. Our operating margins are expected to be just above the 9% level in the second quarter while earnings per share should approximate $0.80 per share compared with the $0.93 in last year’s second quarter.

Profitability in the second quarter will be impacted by a number of factors with the single largest factor being heavier spending within our global outdoor businesses to support continued long term growth. Now that includes investments related to expansion into new geographic areas, new retail store openings and an increase in our global advertising spend. In addition outdoors’ distribution expense as a percent to sales will increase as we take actions to ensure on time deliveries during the heavier shipping periods of the second half. Also keep in mind the second quarter for outdoor businesses represents only 18% of the total year’s revenues. That means that the investments during the quarter stand out more than they would in other quarters due to seasonality factors.

I want to be clear that while the second quarter will be impacted by the spending levels within our outdoor businesses, these businesses remain very strong. In fact that is the reason we are willing to make the investments we have outlined. Though operating margins for outdoor in the second quarter could be down 300 basis points, full year operating margins for this coalition should improve by 50-100 basis points and that includes the incremental spend during the second quarter.

Now there are two other factors impacting the second quarter although to a much lesser extent than outdoor. First, our sports wear business will again be up against the tougher comps of last year’s second quarter. As in the first quarter the loss of revenues from a major customer is impacting the expense to sales relationships within this coalition. Revenue and profit comparisons for the second half of the year will improve within our sports wear coalition. While first half revenues are expected to decline by about 7%, second half revenues should increase by 2-3% due to easier comps versus last year and improved assortments in our retail stores.

Profitability improvements will result from the exit of the women’s business and improved performance within our own retail business where mark down activity was severe during the latter part of 2007. Our buying practices for 2008 in terms of quantities and assortments will result in lower risk for our store operations.

In addition, while our contemporary brands were accretive for the first quarter, the second quarter for these businesses represents only 12% of the full year revenues and this seasonality impact will result in these brands being diluted in the second quarter by about $0.02 per share. Again this is a seasonality issue related to the changing relationships of quarterly results within VF. The full year contribution related to these new businesses is expected to be about $0.10 per share.

Finally related to the second quarter it is important to understand that one we did expect that the second quarter would reflect the changing seasonality of our business as I have just outlined, two the heavier spending in outdoor was planned and three our full year projections continue to indicate improvement in our operating margins of about 40 basis points.

Now a few comments on our full year expectations. As indicated in the press release we are confirming our full year guidance of 9% top line growth and 10% growth in earnings per share. As Eric indicated the environment isn’t getting any easier but taking into account current conditions we are confident in confirming this strong performance.

Eric?

Eric Wiseman

Thanks Bob. Before we take your questions let me close by highlighting why we are so confident in our 2008 guidance. First, our projections include the benefits of new store roll outs and the strong performance of our retail operations including the anticipated improvement in profitability that results from our growing retail scale and higher mix of full price stores to outlet stores.

Second, our projections include a continuation of the strong growth and profitability of our international operations as seen in the first quarter.

Third, our forecast anticipates the continuation of the growth within our outdoor businesses both in the U.S. as well as overseas based on existing bookings.

Fourth, our jeans wear revenues are expected to stabilize so their annual revenue in 2008 should approximately 2007. We have demonstrated in the first quarter we can maintain and improve the profitability of these businesses in this challenging environment.

Fifth, our sports wear comparisons should improve to a level where annual revenues and earnings are about equal to prior year amounts as we comp against a particularly challenging second half to 2007 and benefit from the exit of the women’s sports wear.

Finally, our contemporary brands should continue to provide strong contribution to our 2008 results.

We’d be delighted to take your questions.

Question-And-Answer Session

Operator

If anyone in our telephone audience would like to ask a question simply press the * key followed by the digit 1 on your touchtone telephone. Again that is *1 if you would like to ask a question. If you are on a speaker phone please make sure your mute function is disengaged. It can block your signal from reaching us. Again that is *1.

We’ll take our first question from Robert Drbul with Lehman Brothers.

Robert Drbul – Lehman Brothers

Hi good afternoon. Eric I guess the question that I have for you…you guys touched on it a little bit. Can you elaborate more on the pick up on the spend on the outdoor side in terms of exactly what you are going to be spending the money on? Can you put any metrics around the timing of it as to why you are doing it right now? Just maybe elaborate a little bit more from that side.

Eric Wiseman

Yeah, I don’t have, Bob, specific dollar amounts by initiative. I will talk about the text of initiatives for you though. We have significant new store openings in outdoor in the second quarter that require immediate investment. Those stores we know our outdoor stores work for us and will deliver for us in the second half and beyond. Second we are launching the North Face eCommerce site on August 1. The North Face marketing site goes live in June and we’re stepping up and investing to create what we think is going to be a killer eCommerce site for VF Corporation. We are also investing in marketing in both Vans and in North Face. We are investing in both people and in advertising budget in this quarter to drive our business in the second half. Those are the three front end oriented things. Last, as you can imagine with the growth of the North Face it strains our distribution center’s operations to get the goods out in the third quarter. We move so much volume in the third quarter. We are bringing staff on board in the second quarter to get organized and prepared to make the shipments we know we can make in the third quarter because we are going to have the inventory and we definitely have the orders.

Robert Drbul – Lehman Brothers

Okay. Great. Just a follow-up for Bob. On the foreign exchange and the $0.09 for the quarter, how should we think about that going forward in terms of this new guidance? What do you anticipate or how have you factored that into your full year guidance?

Robert Shearer

Bob we have taken a pretty cautious view frankly relative specifically to the Euro which is by far what impacts us more than anything else. As a matter of fact the $0.09 actually captures most of the benefit that we expect to see for the full year. Again, if the Euro stays anywhere close to the $1.60 mark which is where we are today there is obviously some upside there. So we have taken a cautious view. Again, nearly all of it…The $0.09 represents nearly all of the benefit that we have anticipated for the full year.

Robert Drbul – Lehman Brothers

Great. Thanks very much.

Operator

We’ll take our next question from Jeffery Edelman with UBS Warburg.

Jeffery Edelman – UBS Warburg

Good afternoon. Eric could you address the jeans wear business a little more in terms of you said it was trending down to some of your lower price points as well as some retailer cut backs and inventories. A lot of this has been a replenishment business anyways. But the stores reduced their stocks and now you are at a lower level and you expect sales to be better. Can you talk about the price point issue and why things should level off as we get into the second and third quarters?

Robert Shearer

Sure. We do think that some of what happened in the first quarter will not be repeated. Let me talk about those things first. First, we did have the retailers did reduce their inventory as consumer trends got more and more negative in the first quarter. The inventory expectations declined and there was less replenishment because there was less consumer take away and people were aiming at lower inventory targets. So that definitely impacted us and we think we are at stable inventory levels now.

Second, it was cold out there and the seasonal businesses across all channels are off to a very slow start this year. It will get warm and that stuff will sell but it did get off to a lower start. We think the combination of those two events was responsible for about half of our decline in business in the Americas.

On the other side of it there is just plain consumer slow down out there that has taken part of the other pieces of the slow down and on top of that in times like this some consumers flock to more value price points. That happens in every channel of distribution where people that were shopping in upper scale department stores that are moving downtown, there are people from mid tier that are moving to mass and there are people in mass that are going to the very lowest price point. As that happens and people go to the very lowest price point in the mass channel that is not where our strong brands exist nor where we want them to exist. So that has affected us as well.

Did that help you?

Jeffery Edelman – UBS Warburg

Yes it does. Bob, for you…is the first quarter a seasonal low for seven in terms of profitability?

Robert Shearer

Actually Jeff the second quarter is more so. The first quarter is stronger than the second quarter.

Jeffery Edelman – UBS Warburg

Because based on the numbers you threw out in terms of the contributions to sales as well as operating profit it looked as though those businesses had a roughly 15% operating margin in the first quarter which I believe is a good bit below what we were looking at expectations for the year so is there something else that might have depressed the profitability of those numbers?

Robert Shearer

No. You have to remember Jeff that when we talk about the acquisitions it does include Seven for All Mankind, it includes lucy and it includes Majestic. Alright…Majestic wasn’t owned in prior years. So it includes all of those pieces.

Jeffery Edelman – UBS Warburg

Okay. I’ll just….thanks.

Operator

Next we’ll hear from the line of Kate McShane with Citigroup.

Kate McShane – Citigroup

Good afternoon. Can you talk a little bit about what you are seeing internationally and that a large portion of your growth was a strong result internationally and we are hearing Western Europe in particular is getting significantly weaker. Does your guidance incorporate a weaker international environment and can you quantify how much exposure you have in some of the Western European countries?

Robert Shearer

The good news for us is our international business is becoming more and more diverse as well. First of all we have seen a modest slow down in the Western European markets and that is reflected in our guidance for the year and in all of our forecasts. The flip side of that is in India and China and Russia and Latin and South America we are seeing strong growth so all of that comes together in our international numbers and it is all reflected in our forecast including some new softness in Western Europe. We have captured all that in our numbers, we think.

Kate McShane – Citigroup

Okay. Separate question…can you quantify what the backlog was for the North Face for 2008?

Eric Wiseman

We haven’t traditionally been talking about backlogs. What I will comment on is that we’ve said our outdoor businesses will grow in the mid-teens rate this year and I will tell you we have the bookings to support that right now.

Kate McShane – Citigroup

Okay. Thank you.

Operator

We’ll take our next question from Omar Saad with Credit Suisse First Boston.

Omar Saad – Credit Suisse First Boston

Thank you. I wanted to follow-up a little bit on one of the previous questions on your kind of overall macro outlook. When you gave guidance last, I think it was in February on a call, you reiterated it today and it seems to be the environment has probably gotten a little bit worse since then. Can you help us understand exactly what your macro expectations are for those second, third and fourth quarters? Do you think the environment or are you assuming the environment is going to stay this bad? Are you assuming it is going to get materially worse or maybe improve a little bit? Can you help us kind of get some broad perspective to understand what is imbedded in your guidance?

Eric Wiseman

I think in general we assume it is going to stay this bad. We’re not expecting any improvement. We’re not expecting a deterioration.

Omar Saad – Credit Suisse First Boston

Perfect.

Robert Shearer

That’s really not a perfect world, I’ll add. But that’s what we are expecting.

Omar Saad – Credit Suisse First Boston

No, that is perfect. That is a good answer. That is helpful. On the women’s bit with Nautica you are kind of walking away from that business. Can you help us understand…women’s has been such a tough category for so many companies for the last couple of years but it is such a huge part of the part of the branded apparel world out there…can you help us understand what is your exposure to the women’s side of the business? What do you see as the opportunities there either in your existing brands or in acquisitions and how to increase, if you want to increase, that exposure?

Robert Shearer

Well it is a complex question and we have to talk about that question from a lot of angles. For example in our Lee business in the mid-tier is very strong with women’s and we are gaining share in mid-tier channel with our women’s business. The same is a strong women’s business in the mass channel as well. The North Face has a growing and strong women’s business in both sports wear and outer wear. I think the traditional department store kind of better sports wear lines are really, really struggling and I think that is where you see the other companies kind of really struggle. We struggled to get a foot hold in that space while we launched the women’s Nautica initiative into what probably couldn’t have been worse timing in that space in the department store pad.

The other side of that…as I said we are having some success with women’s. We think our businesses like Seven for All Mankind are having terrific growth in the contemporary space with women’s and that sector – the contemporary space seems to be growing and we don’t see that slowing down much.

Omar Saad – Credit Suisse First Boston

Do you have an idea of what your overall percent of your business is women’s?

Robert Shearer

I don’t know that. I don’t.

Omar Saad – Credit Suisse First Boston

Okay. One last question…the switch to lower price point product in the jeans business, are you saying that there are some customers who are trading out of the Riders and Wrangler and Lee brands to private label?

Eric Wiseman

I think there are people who are trading out of mid-tier to mass. I think within mid-tier there are people moving to Lee where we have a lower price point in that channel relative to the competition and we seem to be…not seem to be we are gaining share. We are gaining share partly because we have great products and partly because of the pressure on price.

In the mass channel there has been some movement to the lowest price points. It is a very minor movement. It is not like there is a mass herding mentality thing going on there but my guess would be kind of low single-digit erosion from us moving towards those price points.

Omar Saad – Credit Suisse First Boston

Perfect. Thank you.

Operator

The next question is from Virginia Genereux with Merrill Lynch.

Virginia Genereux – Merrill Lynch

Thank you. Hey Eric and Bob and Cindy. How about…if you guys can talk about any seasonality of your international business? It was 27% last year…I think you said 36% in the first quarter which is a pretty nice growth rate. Is it pretty consistent across the quarters or do you have quarters that are bigger internationally?

Robert Shearer

We do have quarters that are bigger and actually as a percent of total…now that’s the way I will speak to it, Virginia, it is not necessarily dollars but it is a percent to our total business in each quarter. Actually the first quarter is one of the larger quarters. So I mentioned 36%. Actually the second quarter that declines somewhat. It will be closer to a 27% level. For the full year right now we are looking for our international businesses being about 30%. So there is some seasonality there as well.

Virginia Genereux – Merrill Lynch

That’s great. I think you said to Bob Drbul that you have a pretty conservative currency forecast. It doesn’t sound like you think the Euro is staying at $1.60 or whatever?

Robert Shearer

It’s just we generally…it has been our practice to take a fairly conservative view relative to the Euro. So the second half we just have it planned a lot closer to the $1.40, which is not all that far from where we were last year. Again we are just not building the kind of relationships we are seeing today.

Virginia Genereux – Merrill Lynch

That’s good. I think you are low. You’ll take it anyway. How about Eric, what would you say as you think about organic growth you mentioned some dynamics that pressured organic growth…I think you said you are looking for 5% or so in the second quarter. How going forward what do you think we should think about as the rate for organic growth for the portfolio and the contributors to that? That is a tricky one.

Eric Wiseman

That is a complex question. When we gave our guidance for the future of VF a few months ago we said that we think we can get 67% organic growth. We absolutely still believe that. There will be quarters and times when we exceed that over the next five years and there will be quarters and times when it is more challenging. But we absolutely think that is the kind of numbers we can post with the brand portfolio that we have. It is really complicated Virginia to get more specific than that because you have to speak to every market, every brand and every situation. We have businesses that are far exceeding that right now; our outdoor businesses and our contemporary businesses are delivering organic growth at a much stronger rate than that in this particular quarter. Our domestic jeans wear business delivered at a much lower rate than that. Part of that is ongoing and part of that we think will go away.

Virginia Genereux – Merrill Lynch

Okay. That is helpful. How did you guys sort of manage the inventories so well, Bob? Historically there have been rare occasions where a slow down in replenishment would kind of back up on you guys in your own manufacturing facilities. It doesn’t seem like…if your kind of organic inventories were up six or seven and currencies were probably a big contributor to that…it doesn’t seem like that is an issue. How do you manage the inventory that well kind of in your own facilities and at Nautica for that matter?

Robert Shearer

You are absolutely right, Virginia. It really relates to taking a cautious view in the environment and you are right. The point there is when you look at the jeans wear profitability, a challenged quarter to be sure top line, we did a good job of actually improving the profitability a bit. Perhaps you are right on. A lot of that does have to do with controlling those inventories. So we did. We took a very cautious look in terms of building inventories and if we have to chase a bit we will. Particularly in jeans wear which is one of the biggest swing factors especially in this first quarter. We do continue to have a fair amount of our own manufacturing so we have the ability to do that a little bit better than some of the other areas.

Virginia Genereux – Merrill Lynch

But you are not seeing, Bob, any pressure from idling the facilities?

Robert Shearer

No. No we are not.

Virginia Genereux – Merrill Lynch

Okay. That’s great. Just lastly Eric and Bob any comment on input costs? That is still a big issue…the latter part of this year and if you can give us any visibility into 2009? You gave us some good commentary on that in early January…but any update there?

Eric Wiseman

We’re just beginning to get some visibility into 2009 but probably not the right time of year to be discussing that because I’m not sure we have all that sorted out. We are seeing some price cost pressure this year and all of that is incorporated into our expectation that we can deliver 10% earnings per share growth this year.

Virginia Genereux – Merrill Lynch

That’s great. Keep it up.

Operator

We’ll take our next question from John Shanley with Susquehanna Investment Group.

John Shanley – Susquehanna Investment Group

Thank you. Good afternoon. Eric I wonder if you could give us some ideas of what you are planning on doing to stimulate the jeans business domestically? Are there some game plans that you have in the works that basically are going to allow you to get back to where you were this time last year or basically is it just going to be riding market just based on what is happening out there?

Eric Wiseman

I think we do have initiatives that will help us have a better jeans wear business than we had in the first quarter. In fact we know that. Part of that is we have had a lot of programs in test out there at retail that are new product innovations and those tests have been successful and we are getting massive door roll outs behind them once those tests have proven successful. Those roll outs didn’t happen in the first quarter but they will happen in the second and third quarters. The other thing that will not be happening to us we don’t think is we won’t be going through the inventory reduction that we went through in the first quarter to get the inventory platform we are at right now. We think that will stabilize. We are not expecting any improvement in the overall business. It really will come down to us gaining share by having new programs running in every channel of distribution.

The seasonal business also was a big deal in the first quarter. We just didn’t have a warm first quarter. When they kick in early you have a great first quarter and when it is cooler out and they don’t that business moves to the second quarter and it will get warm and we’ll pick up that business as well.

John Shanley – Susquehanna Investment Group

I see. If looking at it regardless of the brands or channels of distribution do you think you are gaining or maintaining market in the domestic jeans market?

Eric Wiseman

We know for certain because we have data that supports it from NPD that we are gaining market share in the mid-tier channel with the Lee brand so that is a big piece of our business. We also believe upstairs in the contemporary space with Seven for All Mankind that we are gaining share. I think in the mass channel we are holding share overall in the mass channel if you look across men’s, women’s and kids. There is a little bit of movement back and forth but I would say we are probably flat in share there.

John Shanley – Susquehanna Investment Group

Okay. Switching gears a little bit…the announcement of the elimination of the women’s sportswear product line…is that going to be made up in terms of revenue by increasing the men’s portion of the business in the Nautica brand?

Eric Wiseman

To put some shape around that the reason we got out of that business is it was an incredibly small business. It will probably not be noticed in a year-on-year comparison with or without that business. It was, however, a business we lost money in and we just have to focus our efforts and energy and resources on the men’s business. Hopefully that will provide some lift to the men’s business. It won’t take a lot of lift to replace what we are giving up.

John Shanley – Susquehanna Investment Group

Okay. Fair enough. The last question I have is can you tell us the number of stores that you have open at the end of the quarter?

Robert Shearer

I’m sorry…number of stores that we had open at the end of the quarter?

John Shanley – Susquehanna Investment Group

I’m sorry the number of retail stores that you had open…how many?

Robert Shearer

641 were opened as of March 31.

John Shanley – Susquehanna Investment Group

Super. Thank you very much.

Operator

I would like to remind our audience if you would like to ask a question please press *1. Next we’ll hear from Todd Slater with Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

Thanks very much and congrats. It seems like a lot of my questions have been asked. I do have just a couple of quick follow-ups. First, if you could just remind us…you said that Nautica women’s was I think a $0.02 drag in the first quarter?

Robert Shearer

That’s correct.

Todd Slater – Lazard Capital Markets

This piece that you are getting out of?

Robert Shearer

The expenses related to the exit of that piece of the business were worth $0.02 per share.

Todd Slater – Lazard Capital Markets

Oh I see. Okay. Was that…were the…if you look at the second, third and fourth quarter of last year with the Nautica business can you quantify that drag on earnings if any?

Robert Shearer

Yeah. During the latter three quarters it has been costing us pretty close to $0.05 per share. So it has been a drain.

Todd Slater – Lazard Capital Markets

On a quarterly basis?

Robert Shearer

On an annual basis.

Todd Slater – Lazard Capital Markets

On an annual basis. Okay. Alright. Then on the retail store count if you could just remind us what your full price number will be to outlet stores? I think you said you are adding 100 this year. So as we go through the year what is the ratio now and what will it be at the end of this year full price to outlets?

Robert Shearer

I don’t have those specific numbers but I can tell you this…the ratio of new store openings full price versus outlet is pretty close to 3/1 for new openings this year.

Todd Slater – Lazard Capital Markets

Full price? And of the six…can you just remind us not the exact numbers but roughly what the break down was on the current space?

Robert Shearer

Right now it is about 60% full price – 50-60% full price. So 40-50% outlet.

Todd Slater – Lazard Capital Markets

Got it. Okay. That’s great. Thanks a lot. All the best.

Operator

We’ll take our next question from Brad Stephens with Morgan Keegan.

Brad Stephens – Morgan Keegan

Hey, good afternoon. Two quick ones. Bob can you walk us through the third quarter and fourth quarter just directionally if you expect the back half up 15% is it more weighted towards one quarter or the other?

Robert Shearer

It is…I tell you it is pretty consistent…the growth is fairly consistent in third and fourth quarters so given the seasonality overall with those businesses historically not a lot of change.

Brad Stephens – Morgan Keegan

Okay. Second I think you said in your last call that your Vans bookings were kind of flat in the first half and you expected to see an improvement as the year progressed. Can you give us an idea if you did see that improvement?

Eric Wiseman

Yeah. We did in fact. Van’s had a better first quarter than we thought they were going to have.

Brad Stephens – Morgan Keegan

In going to the back…the rest of the year? Are you concerned about space?

Robert Shearer

I don’t have an advanced forecast for the year in front of me but I believe it is up from our original plans.

Brad Stephens – Morgan Keegan

Alright thanks.

Operator

And we’ll hear from Eric Tracy with BB&T Capital Markets.

Eric Tracy – BB&T Capital Markets

Good afternoon. I just wanted to follow-up on the input calls and just general macro weakness Eric or Bob if you could maybe just talk about the potential levers that you have had to pull sort of within the supply chain or some sourcing initiatives that you could implement to extract margins going forward?

Robert Shearer

Well as we have historically done we are very, very careful relative to where we place goods so we try never to get over weighted in any one country. So that has been very, very good for us. For example we are not over weighted in China where we are seeing some cost inflation to be sure of. So what we try to do is keep a more flexible approach to our sourcing and that has worked pretty well for us.

Eric Tracy – BB&T Capital Markets

Is there anything within specific coalitions that have more opportunity to again sort of extract some margins for sourcing than others I guess is maybe what I’m trying to get at.

Robert Shearer

I wouldn’t say necessarily coalition by coalition. What I would say is that some of our newer coalitions and newer businesses still aren’t quite as efficient as our heritage businesses where we have engineered our own plants in many cases and also taken those same benefits to our sourcing partners. So we do continue to see some opportunity there. A little bit more in our lifestyle businesses I guess is what I’m saying rather than our heritage businesses.

Eric Tracy – BB&T Capital Markets

Fair enough. Thanks guys.

Operator

At this time we have no further questions. Mr. Wiseman I’ll hand the conference back to you for any closing comments.

Eric Wiseman

Sure. Thank you for joining us and I’ll make a quick closing comment. Earlier this year we talked about guidance for the year of 9% earnings growth, 9% revenue growth and 10% earnings per share growth and we are very encouraged by the progress we have made in the first quarter delivering 10% revenue growth and 14% earnings per share growth. We are also completely committed to making investments in the second quarter behind what has been our best growth story outdoor. We are going to spend the money we need to spend to support this business and we know when we do that we will deliver a year that will do exactly what we promised; 9% revenue growth, 10% earnings per share growth.

Thanks so much for joining us.

Operator

That will conclude our conference. Thank you all for your participation today. We do hope you enjoy the rest of your day.

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